0001086222-19-000210.txt : 20190808 0001086222-19-000210.hdr.sgml : 20190808 20190808161157 ACCESSION NUMBER: 0001086222-19-000210 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 85 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190808 DATE AS OF CHANGE: 20190808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AKAMAI TECHNOLOGIES INC CENTRAL INDEX KEY: 0001086222 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 043432319 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27275 FILM NUMBER: 191009630 BUSINESS ADDRESS: STREET 1: 150 BROADWAY CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6174443000 MAIL ADDRESS: STREET 1: 150 BROADWAY CITY: CAMBRIDGE STATE: MA ZIP: 02142 10-Q 1 akam10q6302019.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________ 
FORM 10-Q
 ______________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to    
            

Commission file number 0-27275
______________________________________________ 
Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)
Delaware
 
04-3432319
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
150 Broadway
Cambridge, MA 02142
(617) 444-3000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
______________________________________________ 
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - par value $0.01 per share
AKAM
Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  x
The number of shares outstanding of the registrant’s common stock as of August 6, 2019: 164,982,488



AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 


2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
515,896

 
$
1,036,455

Marketable securities
526,596

 
855,650

Accounts receivable, net of reserves of $1,612 and $1,534 at June 30, 2019, and December 31, 2018, respectively
523,382

 
479,889

Prepaid expenses and other current assets
178,920

 
163,360

Total current assets
1,744,794

 
2,535,354

Marketable securities
287,046

 
209,066

Property and equipment, net
1,019,407

 
910,618

Operating lease right-of-use assets
359,128

 

Acquired intangible assets, net
176,031

 
168,348

Goodwill
1,586,642

 
1,487,404

Deferred income tax assets
19,677

 
34,913

Other assets
150,511

 
116,067

Total assets
$
5,343,236

 
$
5,461,770


3


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS, continued

(in thousands, except share data)
June 30,
2019
 
December 31,
2018
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
126,539

 
$
99,089

Accrued expenses
250,015

 
328,304

Deferred revenue
110,750

 
69,083

Convertible senior notes

 
686,552

Operating lease liabilities
96,160

 

Other current liabilities
7,350

 
27,681

Total current liabilities
590,814

 
1,210,709

Deferred revenue
5,204

 
4,557

Deferred income tax liabilities
25,099

 
19,624

Convertible senior notes
893,191

 
874,080

Operating lease liabilities
299,062

 

Other liabilities
135,102

 
160,940

Total liabilities
1,948,472

 
2,269,910

Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding

 

Common stock, $0.01 par value; 700,000,000 shares authorized; 164,906,403 shares issued and 163,359,091 shares outstanding at June 30, 2019, and 162,904,550 shares issued and outstanding at December 31, 2018
1,649

 
1,629

Additional paid-in capital
3,760,840

 
3,670,033

Accumulated other comprehensive loss
(42,484
)
 
(48,912
)
Treasury stock, at cost, 1,547,312 shares at June 30, 2019, and no shares at December 31, 2018
(116,247
)
 

Accumulated deficit
(208,994
)
 
(430,890
)
Total stockholders’ equity
3,394,764

 
3,191,860

Total liabilities and stockholders’ equity
$
5,343,236

 
$
5,461,770


The accompanying notes are an integral part of the consolidated financial statements.

4


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
    
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Revenue
$
705,074

 
$
662,759

 
$
1,411,582

 
$
1,331,483

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)
242,193

 
235,487

 
482,936

 
470,312

Research and development
61,439

 
59,709

 
127,580

 
124,774

Sales and marketing
135,106

 
131,680

 
261,382

 
254,233

General and administrative
120,116

 
170,206

 
242,951

 
324,591

Amortization of acquired intangible assets
9,648


8,294


19,247


16,725

Restructuring charges
790

 
266

 
7,179

 
15,174

Total costs and operating expenses
569,292

 
605,642

 
1,141,275

 
1,205,809

Income from operations
135,782


57,117


270,307

 
125,674

Interest income
6,410

 
6,409

 
15,045

 
10,374

Interest expense
(8,446
)
 
(9,204
)
 
(20,562
)
 
(14,054
)
Other expense, net
(578
)
 
(2,769
)
 
(67
)
 
(2,748
)
Income before provision for income taxes
133,168

 
51,553

 
264,723

 
119,246

Provision for income taxes
19,253

 
8,492

 
43,678

 
22,471

Net income
$
113,915

 
$
43,061


$
221,045


$
96,775

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.70

 
$
0.25

 
$
1.35

 
$
0.57

Diluted
$
0.69

 
$
0.25

 
$
1.34

 
$
0.56

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
163,407

 
170,250

 
163,322

 
170,183

Diluted
165,019

 
172,307

 
164,903

 
172,156


The accompanying notes are an integral part of the consolidated financial statements.

5


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Net income
$
113,915

 
$
43,061

 
$
221,045

 
$
96,775

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,849

 
(24,558
)
 
3,351

 
(18,275
)
Change in unrealized gain (loss) on investments, net of income tax (provision) benefit of $(547), $(299), $(1,101) and $572 for the three and six months ended June 30, 2019 and 2018, respectively
1,646

 
921

 
3,077

 
(1,765
)
Other comprehensive income (loss)
4,495

 
(23,637
)
 
6,428

 
(20,040
)
Comprehensive income
$
118,410

 
$
19,424

 
$
227,473

 
$
76,735


The accompanying notes are an integral part of the consolidated financial statements.


6


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Six Months
Ended June 30,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
221,045

 
$
96,775

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
214,270

 
210,393

Stock-based compensation
93,447

 
92,183

Provision (benefit) for deferred income taxes
24,608

 
(12,116
)
Amortization of debt discount and issuance costs
19,628

 
13,759

Restructuring-related software charges

 
2,818

Other non-cash reconciling items, net
1,180

 
8,015

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(38,127
)
 
(16,889
)
Prepaid expenses and other current assets
(23,287
)
 
8,578

Accounts payable and accrued expenses
(52,789
)
 
(27,091
)
Deferred revenue
27,973

 
29,552

Other current liabilities
(18,739
)
 
5,655

Other non-current assets and liabilities
9,570

 
59

Net cash provided by operating activities
478,779

 
411,691

Cash flows from investing activities:
 
 
 
Cash paid for acquired businesses, net of cash acquired
(121,409
)
 
(79
)
Cash paid for equity method investment
(36,008
)
 

Purchases of property and equipment
(158,158
)
 
(98,300
)
Capitalization of internal-use software development costs
(117,620
)
 
(103,409
)
Purchases of short- and long-term marketable securities
(391,758
)
 
(467,886
)
Proceeds from sales of short- and long-term marketable securities
268

 
16,196

Proceeds from maturities of short- and long-term marketable securities
649,262

 
124,370

Other non-current assets and liabilities
2,237

 
(479
)
Net cash used in investing activities
(173,186
)
 
(529,587
)
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of convertible senior notes

 
1,132,622

Proceeds from the issuance of warrants

 
119,945

Purchase of note hedge related to convertible senior notes

 
(261,740
)
Repayment of convertible senior notes
(690,000
)
 

Proceeds related to the issuance of common stock under stock plans
28,772

 
34,103

Employee taxes paid related to net share settlement of stock-based awards
(49,956
)
 
(41,308
)
Repurchases of common stock
(116,247
)
 
(185,512
)
Other non-current assets and liabilities
(1,558
)
 
(4,844
)
Net cash (used in) provided by financing activities
(828,989
)
 
793,266

Effects of exchange rate changes on cash, cash equivalents and restricted cash
2,678

 
(11,460
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(520,718
)
 
663,910

Cash, cash equivalents and restricted cash at beginning of period
1,036,987

 
314,429

Cash, cash equivalents and restricted cash at end of period
$
516,269

 
$
978,339



7


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 
For the Six Months
Ended June 30,
(in thousands)
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds received of $2,216 and $8,656 for the six months ended June 30, 2019 and 2018, respectively
$
54,271

 
$
28,088

Cash paid for operating lease liabilities
69,317

 
 
Non-cash activities:
 
 
 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
63,709

 
 
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses
71,066

 
34,016

Capitalization of stock-based compensation
18,760

 
16,891

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
515,896

 
$
977,488

Restricted cash
373

 
851

Cash, cash equivalents and restricted cash
$
516,269

 
$
978,339


The accompanying notes are an integral part of the consolidated financial statements.

8


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 
Three Months Ended June 30, 2019
(in thousands, except share data)
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stockholders' Equity
Shares
 
Amount
 
Balance at April 1, 2019
163,503,258

 
$
1,640

 
$
3,686,337

 
$
(34,872
)
 
$
(46,979
)
 
$
(322,909
)
 
$
3,283,217

Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
437,733

 
4

 
(11,151
)
 
 
 
 
 
 
 
(11,147
)
Issuance of common stock under employee stock purchase plan
473,462

 
5

 
27,664

 
 
 
 
 
 
 
27,669

Stock-based compensation
 
 
 
 
57,990

 
 
 
 
 
 
 
57,990

Repurchases of common stock
(1,055,362
)
 
 
 
 
 
(81,375
)
 
 
 
 
 
(81,375
)
Net income
 
 
 
 
 
 
 
 
 
 
113,915

 
113,915

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
2,849

 
 
 
2,849

Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
1,646

 
 
 
1,646

Balance at June 30, 2019
163,359,091

 
$
1,649

 
$
3,760,840

 
$
(116,247
)
 
$
(42,484
)
 
$
(208,994
)
 
$
3,394,764



9


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued

 
Three Months Ended June 30, 2018
(in thousands, except share data)
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stockholders' Equity
Shares
 
Amount
 
Balance at April 1, 2018
170,548,139

 
$
1,708

 
$
4,098,218

 
$
(19,785
)
 
$
(18,334
)
 
$
(675,549
)
 
$
3,386,258

Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
378,583

 
5

 
(10,994
)
 
 
 
 
 
 
 
(10,989
)
Issuance of common stock under employee stock purchase plan
543,520

 
5

 
25,763

 
 
 
 
 
 
 
25,768

Stock-based compensation
 
 
 
 
56,503

 
 
 
 
 
 
 
56,503

Equity component of convertible senior notes, net of issuance costs of $1,649
 
 
 
 
275,836

 
 
 
 
 
 
 
275,836

Issuance of warrants related to convertible senior notes
 
 
 
 
119,945

 
 
 
 
 
 
 
119,945

Purchase of note hedge related to convertible senior notes
 
 
 
 
(261,740
)
 
 
 
 
 
 
 
(261,740
)
Repurchases of common stock
(2,159,149
)
 
 
 
 
 
(165,727
)
 
 
 
 
 
(165,727
)
Treasury stock retirement
 
 
 
 
 
 
 
 
 
 
 
 

Net income
 
 
 
 
 
 
 
 
 
 
43,061

 
43,061

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(24,558
)
 
 
 
(24,558
)
Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
921

 
 
 
921

Balance at June 30, 2018
169,311,093

 
$
1,718

 
$
4,303,531

 
$
(185,512
)
 
$
(41,971
)
 
$
(632,488
)
 
$
3,445,278


10


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued

 
Six Months Ended June 30, 2019
(in thousands, except share data)
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stockholders' Equity
Shares
 
Amount
 
Balance at January 1, 2019
162,904,550

 
$
1,629

 
$
3,670,033

 
$

 
$
(48,912
)
 
$
(430,890
)
 
$
3,191,860

Cumulative-effect adjustment to accumulated deficit related to adoption of new accounting pronouncement
 
 
 
 
 
 
 
 
 
 
851

 
851

Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
1,528,391

 
15

 
(48,926
)
 
 
 
 
 
 
 
(48,911
)
Issuance of common stock under employee stock purchase plan
473,462

 
5

 
27,664

 
 
 
 
 
 
 
27,669

Stock-based compensation
 
 
 
 
112,069

 
 
 
 
 
 
 
112,069

Repurchases of common stock
(1,547,312
)
 
 
 
 
 
(116,247
)
 
 
 
 
 
(116,247
)
Net income
 
 
 
 
 
 
 
 
 
 
221,045

 
221,045

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
3,351

 
 
 
3,351

Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
3,077

 
 
 
3,077

Balance at June 30, 2019
163,359,091

 
$
1,649

 
$
3,760,840

 
$
(116,247
)
 
$
(42,484
)
 
$
(208,994
)
 
$
3,394,764



11


AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued

 
Six Months Ended June 30, 2018
(in thousands, except share data)
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stockholders' Equity
Shares
 
Amount
 
Balance at January 1, 2018
169,893,324

 
$
1,699

 
$
4,073,362

 
$

 
$
(21,930
)
 
$
(690,662
)
 
$
3,362,469

Cumulative-effect adjustment to accumulated deficit related to adoption of new accounting pronouncement
 
 
 
 
 
 
 
 
 
 
(38,601
)
 
(38,601
)
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
1,327,017

 
14

 
(38,528
)
 
 
 
 
 
 
 
(38,514
)
Issuance of common stock under employee stock purchase plan
543,520

 
5

 
25,763

 
 
 
 
 
 
 
25,768

Stock-based compensation
 
 
 
 
108,893

 
 
 
 
 
 
 
108,893

Equity component of convertible senior notes, net of issuance costs of $1,649
 
 
 
 
275,836

 
 
 
 
 
 
 
275,836

Issuance of warrants related to convertible senior notes
 
 
 
 
119,945

 
 
 
 
 
 
 
119,945

Purchase of note hedge related to convertible senior notes
 
 
 
 
(261,740
)
 
 
 
 
 
 
 
(261,740
)
Repurchases of common stock
(2,452,768
)
 
 
 
 
 
(185,512
)
 
 
 
 
 
(185,512
)
Net income
 
 
 
 
 
 
 
 
 
 
96,775

 
96,775

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(18,276
)
 
 
 
(18,276
)
Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
(1,765
)
 
 
 
(1,765
)
Balance at June 30, 2018
169,311,093

 
$
1,718

 
$
4,303,531

 
$
(185,512
)
 
$
(41,971
)
 
$
(632,488
)
 
$
3,445,278


The accompanying notes are an integral part of the consolidated financial statements.

12


AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Akamai Technologies, Inc. (the “Company”) provides solutions for delivering, optimizing and securing content and business applications over the Internet. Its globally-distributed platform comprises more than 200,000 servers across more than 130 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company currently operates in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the Internet.

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed in, or omitted from, these interim financial statements. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 28, 2019.

The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of the results of all interim periods reported herein.

Newly-Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance that requires companies to present assets and liabilities arising from leases on the consolidated balance sheet. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company adopted this standard on January 1, 2019 on a modified retrospective basis by applying the new standard to its lease portfolio as of January 1, 2019, while continuing to apply legacy guidance in the comparative periods.

The Company elected to use the package of practical expedients available under the transition provisions of the guidance, which allows companies to not reassess prior conclusions related to contracts containing leases, lease classification and capitalization of initial direct costs. The Company also elected not to apply the hindsight practical expedient related to its lease transactions.

Adoption of the standard required the Company to record ROU assets and lease liabilities for its operating leases related to real estate and co-location arrangements. The operating leases resulted in the recognition of ROU assets and lease liabilities of $362.2 million and $394.1 million, respectively, as of January 1, 2019. The adoption of the standard also resulted in elimination of deferred rent liabilities of $31.7 million, as of January 1, 2019, that are now recorded as a reduction of the ROU asset. The standard did not have an impact on the Company’s results of operations or cash flows.

Stranded Tax Effects Resulting from U.S. Tax Cuts and Jobs Act

In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act ("TCJA") that was enacted in 2017. This guidance was effective for the Company on January 1, 2019. The adoption of this new accounting guidance resulted in the reclassification of $0.9 million of income tax benefits resulting from the TCJA from accumulated other comprehensive loss to accumulated deficit. The adoption of this new accounting guidance did not have an impact on the Company's results of operations or cash flows.


13


2. Significant Accounting Policies Update

The Company's significant accounting policies are detailed in Note 2 of its annual report on Form 10-K for the year ended December 31, 2018. However, the following policies have been updated as of January 1, 2019.

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment generally includes purchases of items with a per-unit value greater than $1,000 and a useful life greater than one year. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives of property and equipment. Changes to the estimated useful lives are recorded prospectively from the date of the change. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income from operations.

The Company has implemented software and hardware initiatives to manage its global network more efficiently and, as a result, the expected average useful life of its network assets, primarily servers, increased from four years to five years, effective January 1, 2019. These changes decreased depreciation expense by $9.2 million and $16.7 million for the three and six months ended June 30, 2019, respectively, and increased net income by $7.6 million and $13.9 million for the three and six months ended June 30, 2019, respectively, or $0.05 and $0.09 per share, for the three and six months ended June 30, 2019, respectively.

Operating Leases

The Company enters into operating leases for real estate assets related to office space and co-location assets related to space or racks at co-location facilities and related equipment for its servers and other networking equipment. The Company determines if an arrangement contains a lease at the inception of a contract by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration and the right to obtain the economic benefits from the use of the identified asset.

Upon commencement of a lease, the Company records an ROU asset that represents the Company’s right to use the underlying asset for the lease term and a lease liability that represents an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Lease payments are discounted at the lease commencement date using the rate implicit in the lease unless that rate is not readily determinable. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate has been applied based on the Company's credit-adjusted risk-free rate. The incremental borrowing rate at January 1, 2019 (the date the new lease standard was adopted) was used to calculate the present value of the Company’s lease portfolio as of that date.

The Company often enters into contracts that contain both lease and non-lease components. Real estate non-lease components include real estate taxes, insurance, maintenance, parking and other operating costs. Co-location non-lease components include utilities and other operating costs. As of January 1, 2019, the Company includes both lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities based on actual usage, are not included in the measurement of ROU assets and lease liabilities, but are expensed when the event determining the amount of variable consideration to be paid occurs.

The Company’s lease terms often include renewal options and, particularly in the case of co-location arrangements, may include evergreen provisions. The Company’s ROU assets and lease liabilities generally do not include the options to extend, or terminate, unless it is reasonably certain that the Company will exercise these options. The Company has elected to exclude leases for certain networking equipment with terms of 12 months or less from its ROU assets and lease liabilities on its consolidated balance sheet.

Lease expense is recognized on a straight-line basis over the lease term.

Equity Method Investments

The Company accounts for equity investments in which it has significant influence, but not a controlling financial interest, using the equity method of accounting. Under the equity method of accounting, investments are initially recorded at cost, less impairment, and subsequently adjusted to recognize the Company’s share of earnings or losses. 


14


In February 2019, the Company and Mitsubishi UFJ Financial Group ("MUFG") announced the establishment of a joint venture, the Global Open Network, Inc. ("GO-NET"), and their plans to offer a new blockchain-based online payment network. The Company's 20% stake in GO-NET is accounted for using the equity method. As of June 30, 2019, the Company's $36.0 million investment is included in other assets on the consolidated balance sheet.

Recent Accounting Pronouncements

In June 2016, the FASB issued guidance that introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance will be effective for the Company on January 1, 2020. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

In August 2018, the FASB issued guidance which changes the fair value measurement disclosure requirements. This guidance will be effective for the Company on January 1, 2020. The Company is evaluating the impact the update will have on its disclosures.

In August 2018, the FASB issued guidance which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance for capitalizing costs associated with developing or obtaining internal-use software. This guidance will be effective for the Company on January 1, 2020. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

3. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of June 30, 2019 and December 31, 2018 (in thousands):

 
 
 
Gross Unrealized
 
 
 
Classification on Balance Sheet
 
Amortized Cost
 
Gains
 
Losses
 
Aggregate
Fair Value
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
13,558

 
$
22

 
$

 
$
13,580

 
$
13,580

 
$

Corporate bonds
710,794

 
915

 
(691
)
 
711,018

 
442,522

 
268,496

U.S. government agency obligations
75,257

 
19

 
(57
)
 
75,219

 
70,215

 
5,004

 
$
799,609

 
$
956

 
$
(748
)
 
$
799,817

 
$
526,317

 
$
273,500

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
40,000

 
$

 
$
(7
)
 
$
39,993

 
$
39,993

 
$

Commercial paper
282,996

 

 
(50
)
 
282,946

 
282,946

 

Corporate bonds
685,653

 
1

 
(4,309
)
 
681,345

 
482,088

 
199,257

U.S. government agency obligations
50,876

 

 
(404
)
 
50,472

 
50,472

 

 
$
1,059,525

 
$
1

 
$
(4,770
)
 
$
1,054,756

 
$
855,499

 
$
199,257



The Company offers certain eligible employees the ability to participate in a non-qualified deferred compensation plan. The mutual funds held by the Company that are associated with this plan are classified as restricted trading securities. These securities are not included in the available-for-sale securities table above but are included in marketable securities in the consolidated balance sheets.

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss in the consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest income in the consolidated statements of income. As of June 30, 2019, the Company held for investment corporate and government bonds with a fair value of $293.9 million, which are classified as

15


available-for-sale marketable securities and have been in a continuous unrealized loss position for more than 12 months. The unrealized losses of $0.6 million related to these corporate and government bonds are included in accumulated other comprehensive income as of June 30, 2019. The unrealized losses are attributable to changes in interest rates. Based on the evaluation of available evidence, the Company does not believe any unrealized losses represent other than temporary impairments.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities as of June 30, 2019 and December 31, 2018 (in thousands):

 
Total Fair Value
 
Fair Value Measurements at Reporting Date Using
 
 
Level 1    
 
Level 2    
 
Level 3    
As of June 30, 2019
 
 
 
 
 
 
 
Cash Equivalents and Marketable Securities:
 
 
 
 
 
 
 
Money market funds
$
2,550

 
$
2,550

 
$

 
$

Commercial paper
13,580

 

 
13,580

 

Corporate bonds
711,018

 

 
711,018

 

U.S. government agency obligations
75,219

 

 
75,219

 

Mutual funds
13,825

 
13,825

 

 

 
$
816,192

 
$
16,375

 
$
799,817

 
$

 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
Cash Equivalents and Marketable Securities:
 
 
 
 
 
 
 
Money market funds
$
380,260

 
$
380,260

 
$

 
$

Certificates of deposit
39,993

 
39,993

 

 

Commercial paper
282,946

 

 
282,946

 

Corporate bonds
681,345

 

 
681,345

 

U.S. government agency obligations
50,472

 

 
50,472

 

     Mutual funds
10,016

 
10,016

 

 

 
$
1,445,032


$
430,269


$
1,014,763


$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration related to a completed acquisition
$
(6,300
)
 
$

 
$

 
$
(6,300
)


As of June 30, 2019 and December 31, 2018, the Company grouped certificates of deposit, money market funds and mutual funds using a Level 1 valuation because market prices for such investments are readily available in active markets. As of June 30, 2019 and December 31, 2018, the Company grouped commercial paper, corporate bonds and U.S. government agency obligations using a Level 2 valuation because quoted prices for identical or similar assets are available in markets that are inactive. The Company did not have any transfers of assets between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the six months ended June 30, 2019.

When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. When available, the Company uses quoted market prices to measure fair value. The valuation technique used to measure fair value for the Company's Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that primarily use market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

The valuation technique used to measure fair value of the Company's Level 3 liabilities, which consist of contingent consideration related to the acquisition of Cyberfend, Inc. in 2016, was primarily an income-based approach. The significant unobservable input used in the fair value measurement of the contingent consideration was the likelihood of achieving certain post-closing financial results.


16


Contractual maturities of the Company’s available-for-sale marketable securities held as of June 30, 2019 and December 31, 2018 were as follows (in thousands):

 
June 30,
2019
 
December 31,
2018
Due in 1 year or less
$
526,317

 
$
855,499

Due after 1 year through 3 years
273,500

 
199,257

 
$
799,817

 
$
1,054,756



The following table reflects the activity for the Company’s major classes of liabilities measured at fair value using Level 3 inputs during the six months ended June 30, 2019 (in thousands):

 
Other Liabilities:
Contingent Consideration Obligation
Balance as of January 1, 2019
$
(6,300
)
Cash paid upon achievement of milestone
6,300

Balance as of June 30, 2019
$



4. Accounts Receivable

Net accounts receivable consisted of the following as of June 30, 2019 and December 31, 2018 (in thousands):
 
 
June 30,
2019
 
December 31,
2018
Trade accounts receivable
$
378,469

 
$
337,445

Unbilled accounts receivable
146,525

 
143,978

Gross accounts receivable
524,994

 
481,423

Allowance for doubtful accounts and other reserves
(1,612
)
 
(1,534
)
Accounts receivable, net
$
523,382

 
$
479,889



5. Incremental Costs to Obtain a Contract with a Customer

The following table summarizes the deferred costs associated with obtaining customer contracts, specifically commission and incentive payments, as of June 30, 2019 and December 31, 2018 (in thousands):

 
June 30,
2019
 
December 31,
2018
Deferred costs included in prepaid and other current assets
$
41,180

 
$
41,955

Deferred costs included in other assets
21,857

 
26,338

Total deferred costs
$
63,037

 
$
68,293



During the three and six months ended June 30, 2019, the Company recognized $10.8 million and $21.6 million, respectively, of amortization expense related to deferred commissions. During the three and six months ended June 30, 2018, the Company recognized $10.8 million and $21.7 million, respectively, of amortization expense related to deferred commissions. Amortization expense related to deferred commissions is primarily included in sales and marketing expense in the consolidated statements of income.


17


6. Goodwill and Acquired Intangible Assets

The change in the carrying amount of goodwill for the six months ended June 30, 2019 was as follows (in thousands):

Balance as of January 1, 2019
$
1,487,404

Acquisition of Janrain, Inc.
99,685

Foreign currency translation
(447
)
Balance as of June 30, 2019
$
1,586,642



The Company tests goodwill for impairment at least annually. Through the date the consolidated financial statements were issued, no triggering events had occurred that would indicate a potential impairment exists.

Acquired intangible assets that are subject to amortization consisted of the following as of June 30, 2019 and December 31, 2018 (in thousands):

 
June 30, 2019
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Completed technology
$
154,091

 
$
(